Taiwan,Inc.
A Home for Global Business
By Dan Blumenthal, Rupert Hammond-Chambers,
Michael Mazza, Gary Schmitt, and Derek Scissors
A M E R I C A N
E N T E R P R I S E
I N S T I T U T E
Executive Summary
With the signing of its economic cooperation
framework agreement (ECFA) with China in the
rearview mirror, Taiwan now has an opportunity to pursue expanded, speedier economic liberalization. First and foremost, this will enrich
Taiwan and benefit its people. Second, a more
open economy will naturally draw increased
investment from American and other multinational companies that, in turn, will lead their
respective governments to take a greater interest in Taiwan’s security and prosperity.
Taiwan should undertake a set of local economic reforms to reduce government interference with business and to strengthen the island’s
comparative advantages. In other words, Taiwan’s general policy should be to make itself
more attractive as a commercial hub.
Based on interviews with executives at multinational companies operating in Taiwan, as well
as with a few key policy advisers, this paper
suggests measures designed to make Taiwan a
commercial hub. We identify Taiwan’s critical
strengths and weaknesses and indicate the
improvements that will make the island a commercial center. Our interviews and investigations
point to six often connected areas where improvement is critical and where purely domestic actions
are most valuable:
1. Traditional government policy involving
regulation and taxes;
2. Financial policies (both monetary and
regarding financial market reform);
3. Education and the labor force;
4. Targeting areas of comparative advantage;
5. Leveraging ECFA; and
6. Marketing Taiwan internationally.
In pursuing our outlined course, Taiwan could
improve the welfare of its people. It could also
increase its international space without long and
uncertain multilateral diplomatic negotiations.
With Taiwan as a commercial hub, more people
would recognize the island’s importance, more
expatriates would live there, and more people in
the United States and around the world would
have a stake in its success. This would help
enhance Taiwan’s security, make it less likely
that China would underestimate the international community’s interest in the island’s future,
and, in turn, Taiwan could become an even more
attractive destination for international business.
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Taiwan, Inc.:
A Home for Gobal Business
Introduction
The Challenge
Taiwan stands at a fork in the road. It enjoys an
improved relationship with China—stemming
in large part from enhanced commercial ties
after the signing of the 2010 Economic Cooperation Framework Agreement (ECFA)—but faces
a largely inert American policy toward itself.
Taipei appears content to accept both the
potential benefits of liberalized cross-Strait
trade and whatever increase in Taiwan’s international status that Beijing implicitly accepts.
Such is the path of least resistance, but one
that does not necessarily lead to the brightest
future for this island democracy of 23 million
people.
On the other hand, Taiwan can choose to
take a more difficult yet more rewarding road.
This road may be strewn with domestic obstacles in the short term, but will lead to greater
prosperity, greater international presence, and a
renewed relationship with the United States
over the long term.
It is this second path—the path of expanded,
speedier economic liberalization—that Taiwan
should take. First and foremost, this will enrich
Taiwan and benefit its people; Taiwan is already
a prosperous country, but greater prosperity is
within reach. Second, a more open economy
will naturally draw increased investment from
American and other multinational companies
that, in turn, will lead their respective governments to take a greater interest in Taiwan’s
security and prosperity. In other words, deep
economic reform on Taiwan’s part can lead to
better economic growth, a stronger US-Taiwan
relationship, and enhanced international stature.
The primary objective of Taiwanese economic
policy is to seek more access to world markets.
Although a worthy goal, this should not be an
exclusive goal. Instead, Taiwan’s government
should consider how to bring the world to its
doorstep. This may seem a daunting task, but
there is a way to do so: dramatically improve
Taiwan’s business environment and make the
island a commercial hub for multinational business operations in Asia.
The signing of ECFA between Taiwan and
China in June 2010 was a positive step for Taipei.
Liberalizing trade relations between the two
countries will be mutually beneficial. However,
this policy alone is inadequate. If Taiwan had
been able to sign an ECFA with the mainland in
the 1980s when China’s economic boom was first
occurring, an agreement would have produced
substantial and sustained gains for Taiwan. Going
forward, however, China’s growth will be slower.
Moreover, Taiwan has much less to offer the
mainland than in the past due to the maturation
of China’s domestic economy and manufacturing
sector. Concluding ECFA was thus an important
but insufficient step in securing Taiwan’s future
security and prosperity.
ECFA is supposed to be complemented by
diversification, with Taiwan seeking to link its
economy more tightly to partners beyond the
Chinese mainland. But it cannot simply look to
accede (several years after the fact) to trade
pacts negotiated by others. Instead, Taipei must
be aggressive in expanding trade and investment on terms that reflect Taiwan’s comparative advantages.
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TAIWAN, INC.: A HOME FOR GLOBAL BUSINESS
That said, the benefits resulting from Taiwan’s
domestic changes may trump—and will certainly
enhance—those deriving from ECFA and further
efforts at regional integration. Such changes are
under Taiwan’s control, and, if done properly, can
improve its prospects regardless of the actions of others. In essence, Taiwan can shape its own destiny.
Moreover, economic liberalization in Taiwan
makes ECFA and regional diversification more
appealing for all concerned. The more economically powerful Taiwan is, the more attractive it is
as a partner for China, the Association of Southeast Asian Nations, and everyone else. The more
open Taiwan is, the more it can gain from greater
bilateral, regional, and global economic and
trade integration.
Taiwan should undertake a set of local economic reforms to reduce government interference
with business and to strengthen the island’s comparative advantages. In other words, the general
policy should be to make Taiwan more attractive
as a commercial hub. This would of course make
Taiwan better able to serve the mainland than at
present, but would also make Taiwan a more
appealing economic partner for others.
Our paper suggests measures designed to reach
that goal. We identify Taiwan’s critical strengths
and weaknesses and indicate the improvements
that will make the island a commercial center.
We utilize, among other things, formal interviews
with executives conducting business in the
region. Our interviews and investigations point to
six often connected areas where improvement is
critical and where purely domestic actions are
most valuable:
1) Traditional government policy involving
regulation and taxes;
2) Financial policies (both monetary and
regarding financial market reform);
3) Education and the labor force;
4) Targeting areas of comparative advantage;
5) Leveraging ECFA; and
6) Marketing Taiwan internationally.
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The Arena
A commercial hub can take multiple forms, and
the variety of possibilities is one attraction for Taiwan. Located in the heart of East Asia, Taiwan as
a commercial hub would offer economic benefits
and opportunities to a region that would otherwise
be underprovided. Examples of these benefits are
information technology, health, and education.
There is steep competition to become a commercial center, particularly in East Asia. The
cause is obvious: the opportunity to exchange
huge amounts of needed goods, services, and
expertise with Mainland China and Southeast
Asia, which features a large and growing Indonesian economy. Tokyo, Hong Kong/Shenzhen,
and Singapore are probably the current leading
hubs, but there are others with similar aspirations, namely Seoul and Shanghai. All of these
hubs are best understood as regions rather than
cities, and service geographic areas beyond the
countries in which they are located. Moreover, all
have much to offer multinationals.
This field is crowded, but Taiwan has the
capacity to compete with any of the entrants—
and possibly even out-compete them. When
asked about Taiwan’s advantages, our survey
respondents (see description under the “What To
Work On Internally” section) cited Taiwan as
having an excellent location, a prowess in technology manufacturing, and the associated capacity for innovation. The country was also noted
for its improved intellectual property (IP) protection, its skilled labor force, and respect for the
rule of law.
In particular, Taiwan has a geographic edge
over Seoul, Singapore, and Tokyo in that it is
closer to Mainland China than all three and closer
to Southeast Asia than is Tokyo or Seoul. Taiwan
also has a manufacturing edge over Singapore.
As compared to Hong Kong and Shanghai, our
respondents emphasized Taiwan’s superior IP
protection, some aspects of labor quality, ability
to innovate, and general technology capacity.
DAN BLUMENTHAL, MICHAEL MAZZA, GARY SCHMITT, AND DEREK SCISSORS
This is only half the story, of course. While
Taiwan certainly has the strength to compete, its
rivals have deep-seeded advantages, too. Seoul,
Shanghai, and Tokyo have greater human and
financial resources to draw on, and Hong Kong
is geographically closer to China. Yet, the victor
in this multisided rivalry will be determined by
which location adopts the better policies.
Wise policies can transform stark structural
inferiority into superiority, while imprudent
policies can lead to the reverse. The difference
between Mainland China in 1977 and in 1997
was not a change in economic endowment.
Rather, China's historic rise is clearly connected
to the policies adopted by the successors to Mao
Zedong, who had managed to destroy or misuse
much of China's comparative advantage during
his three-decade rule
In the same vein, Japan’s structural advantages
did not suddenly disappear in 1990; instead,
Japan’s policymakers failed to make the necessary changes to revitalize the country’s stagnant
economy. Singapore’s economic policies, on the
other hand, have allowed it to excel despite its
geographic and demographic limitations. These
are just a few of the many examples that attest to
the importance of making the right innovative
policy choices.
Taiwanese policy has successfully secured a
central place for Taiwan in technology supply
chains, a powerful accomplishment that uses
the island’s comparative advantage to the
fullest. Unfortunately, Taiwan has not taken the
other necessary steps toward extending that
accomplishment and claiming a place as a (if
not “the”) regional business leader. As a result,
Taiwan falls short when compared to other
business centers in the region.
Specifically, our respondents gave Shanghai
the obvious advantage over Taiwan for its scale of
the domestic market. Tokyo beat Taiwan in
quality of life, and Seoul beat Taiwan in its contribution of government policy to economic performance. Hong Kong was given the edge in
low-cost manufacturing, infrastructure, and
finance. But the big winner—according to our
respondents—was Singapore, which respondents
claimed surpassed Taiwan in financial capability,
tax policy, and governance.
The ultimate proof is in outcomes, which are
not nearly as favorable in Taiwan as they should
be. Singapore’s population is less than onefourth that of Taiwan’s. Yet, Singapore boasted
almost 30 percent higher trade volume than
Taiwan in 2011 because of its role as a transshipment point. Taiwan has the potential to massively boost its own transshipment role, but has
not done so to date.1
The combined population of Hong Kong
and Shenzhen is a bit smaller than Taiwan’s, as is
Hong Kong and Shenzhen’s combined gross
domestic product (GDP). However, they will outstrip Taiwan in a few years—Shenzhen has better
growth prospects than Taiwan due to better policy decisions, not because of the natural development cycle of Shenzhen’s economy. Furthermore,
Taiwan borders China, whereas Seoul borders
impoverished North Korea. Yet, Seoul and its
surrounding province of Gyeonggi have slightly
higher per capita income than Taiwan, in spite of
Taiwan’s superior geographic position.2
Taiwan’s trade volume, however, could match
Singapore’s, if not even exceed it. Taiwan’s GDP
growth could likewise come to match that of
Hong Kong and Shenzhen and even exceed
greater Seoul. These accomplishments are possible if Taiwan becomes more competitive—or,
in essence, more attractive to trade and investment partners of all stripes. Enhanced economic
growth and greater trade are some of the prizes
to be claimed by transforming Taiwan into a
commercial center for the region.
What to Work on Internally
How can Taiwan become increasingly competitive? The conventional approach would be to
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TAIWAN, INC.: A HOME FOR GLOBAL BUSINESS
focus on Taiwan’s comparative advantages.
This is a valuable technique that we will soon
address, but we also wanted to learn from businessmen and corporate executives what particular improvements mattered to them. We
interviewed executives at multinationals headquartered in various countries but all operating
in Taiwan, as well as a few key policy players.
Their suggested improvements coalesce around
six areas, three of which are largely domestic.
Taxes and Regulation. Taxes are critical for the
competitiveness of local firms and as a means to
attract multinationals. The Taiwan government’s
recent decision to cut its corporate income tax
rate from 25 to 17 percent was therefore an
excellent step forward, in part because it gives
Taiwan an advantage over Shanghai, Seoul, and
especially Tokyo.3
Taiwan’s tax policies are hardly ideal, though,
and more changes are necessary. According to
our respondents, for Taiwan to become a commercial hub, it would require more than simply
matching competitors’ tax rates: businesses need
a reason to prefer and then actually move to Taiwan. In this regard, there are many possible
incentives for Taiwan to choose from.
Singapore, for example, offers tax concessions
to multinationals that establish headquarters
there, while Tokyo incentivizes corporate research
and development. Taiwan should choose the most
suitable incentives on the basis of its own comparative advantage. Respondents claimed that a tax
break for transportation to, from, and within Taiwan might be the most promising. (Respondents
also believed that Taiwan needs internal infrastructure upgrades as well as upgrades on infrastructure that connect to the island.)
Aside from corporate taxes, personal taxes
also matter. If Taiwan is to become a hub, the
quality of its service sector must improve,
which requires improved human capital. To
attract and retain the best talent, companies in
Taiwan must provide appropriate compensation
6
and the government must allow those individuals to retain their earnings. Our respondents
agreed that the decision to cut the island’s
estate tax would bring money back to Taiwan,
which is important but will not necessarily
attract new talent.
Taiwan’s highest personal tax rate of 40 percent compares unfavorably to Singapore and
signifies a lost opportunity to outcompete hightax areas such as those in China.4 It is especially
unfortunate that bad tax policy can offset the
attractiveness of Taiwan’s high quality of life
(discussed later in detail). Attracting human talent to Taiwan will be all the more critical given
Taiwan’s very low birth rate.
The consensus on regulation was a familiar
one: Taiwan’s bureaucracy is large, and, perhaps more importantly, is seen as inaccessible
and insufficiently transparent. The “size problem” was frequently put in terms of the number of approvals needed to operate a business.
Executives complained more so, however,
about the lack of transparency from regulatory
decision-makers. Some saw an implicit choice
of either finding a local partner to navigate the
bureaucracy or of needing far more time than
expected to learn how to operate effectively in
Taiwan. Speed, of course, is vitally important to
international business. It is worth noting that
these regulatory barriers effectively serve as
taxes on commerce by raising the cost of doing
business and accentuating the lack of incentive
to relocate to Taiwan.
Our Respondents Said Taiwan Should: Lower
personal taxes, identify and institute corporate
incentives, and make the regulatory environment
more accessible and transparent to reduce the
time needed to acclimate to the hidden operating
costs and to conducting business on the island.
Finance. The availability of capital is critical to
driving business location decisions. It is therefore impossible to be a true commercial center
DAN BLUMENTHAL, MICHAEL MAZZA, GARY SCHMITT, AND DEREK SCISSORS
without a first-rate financial system. Some of
our respondents said that, given the wealth and
sophistication of Taiwan’s economy, it was
more difficult than one might have expected to
raise money in Taiwan. They did not see Taiwan
as exceptionally weak in this area, but they did
think that Taiwan compared somewhat poorly
to other (although not all) commercial hubs in
the region.
In particular, respondents emphasized that the
public role of Taiwan’s banking system is seen as
too large and the foreign role too small. Taiwan
justifies this reality by claiming its government
seeks a level playing field for its own banks. But,
as a result, Taiwanese financial intermediation
has remained inferior. More competition from foreign banks would raise the performance level for
all of Taiwan’s financial institutions and would
drive out of the market those unable to meet their
customers’ needs.
A related complaint was that the banking
sector is operated on too informal a basis, with
relationships mattering as much as the quality
of financial assets and services. Multinationals
have much better success securing loans when
they partner with local companies than when
they approach banks on their own. But this
semirequirement again effectively raises the
cost of doing business in Taiwan. Stock markets
are considered unhelpful for raising capital.
Securing capital is not always a challenge, but it
can often be one, which is incompatible with a
truly first-rate market.
A second set of complaints focused on the
Central Bank of China (CBC). Our respondents
cited CBC operations as lacking transparency
compared to what should ideally be the case
and compared to other regional competitors.
The CBC is not required to make periodic
reports either to the Legislative Yuan or to the
public. Compared to the American Federal
Reserve, this reduces visibility for all actors,
harming the entire economy and making Taiwan generally less attractive.
If Taiwan wants to be a commercial hub,
the CBC’s defense of its operational behavior is
not pertinent. When working to attract multinationals, perceptions matter. A perceived lack
of transparency makes decisions seem arbitrary.
Multinationals suffer further because investment regulations are not well-publicized. Some
respondents actually wondered whether the CBC
has even written regulations in certain areas, citing apparent inconsistencies in policies with Taiwan’s Financial Supervisory Commission. The
appearance of arbitrary decision making and the
lack of coordination in the financial system
cannot help but make international businesses
warier of making a commitment to Taiwan.
Among Taiwan’s direct competitors, Tokyo
and Seoul score consistently high on central
bank transparency, while Singapore does poorly
but is improving.5 Shanghai—and, to some
extent, Hong Kong/Shenzhen—remains shackled
by the Chinese financial system, a weakness Taiwan could exploit but has not. As is the case for
all policy improvements, Taiwan should strive to
match its stronger rivals and to heighten its
advantage over weaker ones.
A narrower financial issue that has a disproportionate impact on multinationals is currency
exchange. The CBC guards against imported
asset inflation by controlling the flow of money
to and from Taiwan. This is the right policy, but,
if too aggressively applied, it could interfere with
Taiwan’s development as a business center. Free
capital movement is one of the most important
contributors to growth. While Taiwan’s inflation
performance stacks up well to its peers, its economic growth lags behind Singapore, Shanghai,
and Hong Kong/Shenzhen.6 Our respondents
feel CBC’s efforts to fight inflation may have
been taken a step too far.
Moreover, when currency exchange is
restricted, companies and individuals must
assume more exchange risk. This is presently
occurring in Taiwan, and it further raises the
cost of doing business. As with other issues,
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TAIWAN, INC.: A HOME FOR GLOBAL BUSINESS
transparency is a concern here: the governing
currency regulations are not quite identical
in Chinese and English, making the business
environment for international corporations a bit
less attractive.
Our Respondents Said Taiwan Should: Make it
easier for multinationals to raise money, permit
freer capital movement in and out of Taiwan,
and make the CBC more open and accountable.
Labor and Education. Labor is obviously central to a country’s competitiveness, and the quality of a labor force is—in the long term—largely
based on education. Our respondents did not
mention labor as a major problem. Rather, they
spoke glowingly of the quality of the work force,
which they cited as more important in their
operations than labor costs. They praised in particular the Taiwan labor force’s capacity for
innovation, a critical quality in differentiating
among competing regions and countries. Even
those foreign companies unfamiliar with Taiwan
can easily determine—through market research—
that the productivity-salary mix for local workers is very competitive.
The stiff competition to be a commercial
center, though, calls for an even better performance, and there are areas for improvement. Some respondents thought the labor
market could become more flexible. Current
law requires that discharged workers be paid
one month’s salary for every year worked,
making it more difficult to downsize when
demand shrinks.7 Whenever it is more difficult
to fire, there is less hiring. This is not to say Taiwan’s 4 to 4.5 percent unemployment is excessive, but that due to regulatory restrictions, the
labor force is not being as fully utilized as in
South Korea or Singapore.
Respondents also raised the difficulty of
importing labor, perhaps due in part to a fear of
a deluge from the mainland. However, for Taiwan
8
to become a business hub, talented workers
must be available to those hiring with little
regard to their country of origin, and employers
should not be inhibited by government in seeking that talent. Needed talent could be identified at the high-skill end, but also at the
low-skill end, or anywhere the local labor force
is not quite as competitive at any particular
time. If the process were carefully managed, the
mainland could even help address deficiencies
in the labor force.
Another labor weakness relates to advanced
business-related education. The Taiwan labor
force was characterized by some respondents as
insufficiently experienced in this area. The need
for better business management education to
partly address this lack of experience was
among the most common views on any topic
expressed by respondents. In particular, many
believed there is a need for a world-class business school in Taiwan that teaches in English.
In addition, respondents repeatedly complained
that they felt government officials had little
experience or no exposure to business itself,
especially when it came to conducting international business—a crippling obstruction to Taiwan becoming a hub.
Respondents saw a lack of specialization in
conventional education. For example, they cited
an insufficient number of engineers for Taiwan’s
high-tech requirements. Several respondents
noted that greater privatization of state-owned
enterprises was a way to encourage specialization, generating greater competition to incentivize the development of currently lacking
education programs.
Our Respondents Said Taiwan Should: Enact
policies designed to enhance a more flexible
labor market, experiment with more labor
imports, and permit more private participation
in education, especially at the university level
and above.
DAN BLUMENTHAL, MICHAEL MAZZA, GARY SCHMITT, AND DEREK SCISSORS
What to Work On Externally
Taiwan’s externally oriented reform should be
secondary to internally oriented reform. Taiwan
can make its own domestic choices to compensate for its unfortunate but minimal influence on
what happens beyond its borders. Even when
looking outward, market access should not be
Taiwan’s highest priority. Market access applies
to only those partners that can be induced to sign
agreements. But other policy choices can make
Taiwan more competitive across the board.
Comparative Advantage. Rather than adopt a
single-minded focus on gaining access to other
markets, Taiwan should first think of its comparative advantages when looking overseas.
The island is land-poor and capital-rich, with a
high-quality but limited-quantity labor force.
Economic policy, then, should sacrifice laborand land-intensive activities for capital- and
skills-intensive ones. This has strong implications for specific sectors.
Some policy priorities follow directly from a
basic catalog of comparative advantages (see
table 1). For example, a policy that avoids countries with strong farming sectors when seeking
trade agreements is a clear mistake. Taiwan
should welcome foreign agriculture (one of
the island’s comparatively weak sectors) in
exchange for market access to sectors where it
is strong.
In general, Taiwan should continue to
emphasize technology but abandon protection
of chemicals, machinery, and other conventional industrial sectors while recognizing its
nascent advantages in service industries such
as finance and health. The government can support comparative advantage by improving education, transportation, and logistics. Barriers to
foreign participation in targeted sectors should
be reduced—for instance, by enhancing dispute
resolution mechanisms and lowering liability
limits. This would boost the financial and trans-
TABLE 1
TAIWAN’S COMPARATIVE ADVANTAGE
Fits
Does Not Fit
Education
Finance
Information Technology
Medicine
Retail (especially online)
Sanitation and water
Telecom
Transport
Agriculture
Chemicals
Construction
Energy
Machinery
Mining
Textiles
Timber/paper
Source: Authors
portation sectors in particular, but it would also
improve the education and retail segments of
the economy.
Our respondents lent concreteness to this
broad assessment of comparative advantage.
Several noted, for instance, that Taiwan could
provide China and other regional emerging
markets with health care, but only if some hospitals were allowed to be for-profit.
Unsurprisingly, the respondents believed a
key comparative advantage for Taiwan was in
the area of technology, stemming from its performance to date. However, maintaining comparative advantage in technology is a separate
challenge entirely. Furthermore, in an effort to
become a commercial center, even a sound performance is not enough—Taiwan must strive to
be a true global leader.
A number of respondents voiced concerns as
to whether Taiwan could maintain its advantage in technology without greater specialization in research and training in the face of a
growing shortage of high-end talent in its labor
market. Respondents also noted that while Taiwan has the capacity to become a leader in
global technology development, its size means
it will have to do so by improving in specific
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TAIWAN, INC.: A HOME FOR GLOBAL BUSINESS
areas rather than by trying to be a leader across
the board.
Respondents deemed protection of IP—once
considered a weakness—a strength. Nonetheless, maintaining comparative advantage in
technology requires truly outstanding IP protection. To encourage innovation, Taiwan’s IP protection should be further enhanced. Patents
should be approved more quickly and last longer,
and enforcement should be sharpened against
violators—including violators of imported IP. An
unbiased, clearer, and faster process of setting
product standards and certification would spur
innovation. These changes would assist key sectors of Taiwan’s economy, including information
technology, medicine, telecom, and even water
treatment and other public health areas.
Taiwan’s greatest natural comparative
advantage is its location. Consequently, strong
transportation infrastructure and regulation are
very important. Our respondents were almost
uniform in characterizing these as okay in quality but certainly capable of improvement. They
claimed internal infrastructure was limiting the
potential for sourcing. Many respondents used
terms such as “improving” and “decent” to
describe shipping infrastructure and regulation,
whereas Taiwan’s position calls for an outstanding performance. Similarly, airport efficiency,
capacity, and related factors were deemed fairly
good, but not at the level of other international
commercial centers.
Our Respondents Said Taiwan Should: Identify
priorities within technology, continue to bolster
IP, improve transport capacity, and generally
look to accentuate strengths rather than conceal
weaknesses.
Economic Cooperation Framework Agreement.
Taiwan’s location and transport capacity are relevant, of course, to another of its advantages—
access to the Chinese market. The ECFA process
has accentuated the importance of this edge. Our
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respondents viewed transport links to the mainland as improving, but felt more should be done
in both aviation and shipping. This was repeatedly stated to be a matter of business, not politics.
Our respondents do, however, want ECFA
deepened and extended. Similar to other aspects
of comparative advantage, Taiwan’s connection
to the mainland could be enhanced or eroded
over time. Our respondents universally agreed
that ECFA makes Taiwan more attractive as a
business hub—for example, to European and
Japanese companies—but stressed that it needs
to be extended. Services are the obvious place
for extension, and banking in particular was
named several times. Moreover, an extension
into services will require freer movement of people across the Taiwan Strait.
Several respondents stated what should be
obvious but sometimes does not seem to be:
ECFA must be part of an overarching strategy.
Respondents suggested that, in future policymaking, Taiwan should try to anticipate changes in its
comparative advantage due to closer links to the
mainland. If Taiwan were to gain new access to
the mainland financial market on a preferential
basis, for example, finance would become an area
of clearer comparative advantage. They also
noted that a Taiwan that is complementary to the
mainland economy could also be complementary
to other emerging economies with similar structures and needs as Mainland China. Taiwan
would then be a more valuable partner to these
other economies as well, and the payoff from
closely following comparative advantage in light
of ECFA would be that much larger.
Our Respondents Said Taiwan Should: Find
ways to further leverage the ECFA process.
Marketing. And then what? If Taiwan took
many of the previously mentioned steps, would
that be sufficient? The answer is no. In a competitive market, advertising cannot substitute
for quality. But it is also true that quality needs
DAN BLUMENTHAL, MICHAEL MAZZA, GARY SCHMITT, AND DEREK SCISSORS
to be advertised. The signing of ECFA is a
branding opportunity and our respondents
argued that Taiwan is long overdue for better
branding. They thought Taiwan was underappreciated and underutilized by multinationals,
due in large part to its failure at self-promotion.
The suggested remedies were divided into what
to promote and how to promote it.
By a good measure, when discussing what to
promote, respondents keyed on the quality of life
Taiwan offers, which was repeatedly described
as the best in “greater China,” which encompasses commercial rivals Hong Kong/Shenzhen
and Shanghai. This quality of life was said to
stem from the friendliness of Taiwan’s people, a
healthy environment, less pollution, a more
trustworthy legal system, and good schools. That
said, there was some concern that areas more
distant from Taipei were less appealing to multinational employees as places to live.
The obvious way for Taiwan to self-promote
is to directly advertise improvements in its business environment, such as freer capital movement. Another is to expose more people to
Taiwan. For this reason, respondents urged
increased efforts to promote tourism. A narrower, more targeted initiative would focus on
establishing English-language business education programs in Taiwan, not only to improve
management skills, but also to attract foreign
business students. This could have a long-term
payoff if these students were to return.
Our Respondents Said Taiwan Should: As a
matter of marketing, work to bring more people
to Taiwan for business, tourism, and, to a lesser
extent, education.
The American Role
Taiwan coming to rival, or even exceed, its
aforementioned competitors as a commercial
center would be a welcome development for the
United States. The strategic dimension looks
almost the same from Washington, DC, as it does
from Taipei: an economically stronger Taiwan
would strengthen all of the island’s relationships.
Not only would Taiwan be a more capable partner for the United States, it would be more valuable in the region and even the world at large.
This would cause all the players—including but
certainly not limited to China—to accord Taiwan
more weight in their decision making, which
would considerably enhance American diplomatic efforts on Taiwan’s behalf.
If the bilateral relationship remained unchanged
and Taiwan became a regional hub, the commercial benefits for the United States would not be
especially significant. Comparative advantage
already dictates US-Taiwan trade: semiconductors lead Taiwanese imports from the United
States and consumer electronics using those
chips lead Taiwanese exports to the United
States.8 American services investment in Taiwan
would increase, but not sufficiently enough to
impact the American economy.
However, accompanying changes in bilateral
relations could be important. If internal Taiwanese reforms to promote business competitiveness were accompanied by expanded ties to
the United States, there would be a noticeable
impact on the American economy, and Taiwan’s
gains would naturally increase. In particular,
American investment and contract work for US
companies in Taiwan would almost surely rise
strongly. These gains would apply if Taiwan liberalized first and then struck agreements with
the United States, or if the bilateral agreements
were part and parcel of internal liberalization.
The case where Taiwan liberalizes first is simple. Taiwan is already a major US trading partner,
punching well above its weight (see chart 1). In
this situation, the United States could win some of
the benefits of Taiwanese liberalization by quickly
signing a comprehensive trade and investment
agreement or by working to quickly bring Taiwan
into a successful Trans-Pacific Partnership.
11
TAIWAN, INC.: A HOME FOR GLOBAL BUSINESS
TAIWAN
FIGURE 1
HITS ABOVE ITS WEIGHT
Source: The Heritage Foundation
The more intriguing case is if internal Taiwanese liberalization and bilateral liberalization
were intertwined. Here, the United States would
encourage an ongoing Taiwanese reform process
with bilateral negotiations and accords. The tools
to accomplish this are well-known: the extant
12
trade and investment framework agreement
(TIFA) negotiations, a possible bilateral investment agreement (BIA), and a free trade agreement (FTA).
A Taiwan reform move could energize TIFA
talks, which in turn would require policy
DAN BLUMENTHAL, MICHAEL MAZZA, GARY SCHMITT, AND DEREK SCISSORS
changes from both countries. Such progress
could create the necessary conditions for a BIA
or even the start of FTA negotiations, which
would then include more liberalization steps.
Alternately, it would be well worth the effort for
the United States to table changes (such as
those indicated by our survey) in TIFA talks that
would improve conditions for American companies doing business with Taiwan but might
also kick-start Taiwan’s internal reform process.
Finally, some of our respondents brought up
the US role without prompting. Several focused
on comparative advantage, identifying the separate, complementary American and Taiwanese
places in the supply chain. Others thought the
United States could assist Taiwan’s commercial
evolution by being supportive, but not overtly so.
They deemed a sustained American commitment
more important than any singular action. This
may argue for the less dramatic steps of successful TIFA talks ahead of any FTA negotiations.
In all cases, if formal US-Taiwan economic
agreements are secured, they will strengthen
Taiwan’s global place, beyond achieving the
core goal of transforming Taiwan into a commercial hub. That would be a further boost to
American efforts to ensure both Taiwan’s security and broader stability in the region.
Conclusion
There is a vigorous, multisided competition for
business in East Asia. Internal economic and
commercial changes are far more worthwhile to
winning this competition than merely striving
for additional access to foreign markets.
A more open and efficient Taiwan would
bring broad and unconditional benefits, and
could even make foreign partners more willing to
deal with Taiwan on both economic and diplomatic fronts. The necessary changes include
more regulatory transparency, more flexibility for
labor and capital, greater transport capacity, and
efforts to advertise these changes to the rest of
the world. The United States can assist Taiwan
with feasible bilateral accords that would economically and strategically benefit both parties,
but Taiwan holds the keys to future prosperity.
In pursuing our outlined course, Taiwan
could improve the welfare of its people. It could
also increase its international space without
long and uncertain multilateral diplomatic
negotiations. With Taiwan as a commercial hub,
more people would take note of its importance,
more expatriates would live there, and more
people in the United States and around the
world would have a stake in its success. This
would help enhance Taiwan’s security, make
it less likely that China would underestimate
the international community’s interest in the
island’s future, and, in turn, Taiwan could
become an even more attractive destination for
international business.9
Notes
1. Directorate-General of Budget, Accounting and
Statistics, Executive Yuan, ROC (Taiwan), “Macro
Database,” http://ebas1.ebas.gov.tw/pxweb/Dialog/
statfile1L.asp (accessed August 16, 2012), and Department of Statistics, Singapore Government, “Key
Annual Indicators,” July 5, 2012, www.singstat.gov.sg
/stats/keyind.html#keyind (accessed July 31, 2012).
2. The Government of the Hong Kong Special
Administrative Region Census and Statistics Department, “Hong Kong Statistics,” July 24, 2012,
www.censtatd.gov.hk/hong_kong_statistics/key_
economic_and_social_indicators/index.jsp (accessed
July 31, 2012); Sophie Lu, Guangdong Province Fact
Sheet (Guangzhou, China: Consulate General of
Switzerland in Guangzhou, February 2012), www
.sinoptic.ch/guangzhou/pdf/2012/20120203_
Fact.sheet_Guangdong.Province.pdf (accessed July
31, 2012); and Statistics Korea, “Regional Income in
2012 (Preliminary),” December 21, 2011, http://kostat
.go.kr/portal/english/news/1/8/index.board?bmode
13
TAIWAN, INC.: A HOME FOR GLOBAL BUSINESS
=read&bSeq=&aSeq=253494&pageNo=1&rowNum
=10&navCount=10&currPg=&sTarget=title&sTxt=
(accessed July 31, 2012).
3. KPMG International, “Corporate Tax Rates
Table,” 2012, www.kpmg.com/global/en/whatwedo
/tax/tax-tools-and-resources/pages/corporate-taxrates-table.aspx (accessed July 31, 2012).
4. KPMG International, KPMG’s Individual Income
Tax and Social Security Rate Survey 2011 (September
2011), www.kpmg.com/Global/en/IssuesAndInsights
/ArticlesPublications/Documents/individual-incometax-social-security-rate-survey-September-2011.pdf
(accessed July 31, 2012).
5. See, for example, Menno Middeldorp, Central
Bank Transparency, the Accuracy of Professional
Forecasts, and Interest Rate Volatility (Utrecht,
Netherlands: Utrecht University School of Economics
Tjalling C. Koopmans Research Institute), http://
igitur-archive.library.uu.nl/CTK/2012-0104-200426
/11-12.pdf (accessed July 31, 2012).
14
6. Middeldorp, Central Bank Transparency . . . and
World Economic Outlook, April 2012: Growth Resuming, Dangers Remain (Washington, DC: World Economic Studies Division Research Department,
International Monetary Fund, April 2012),www.imf
.org/external/pubs/ft/weo/2012/01/pdf/text.pdf
(accessed July 31, 2012).
7. Don Lee, “In Taiwan, Unpaid Leave Instead of
Layoffs Carries Its Own Cost,” Los Angeles Times,
March 9, 2009 (accessed August 31, 2010).
8. United States Census Bureau, “U.S. International
Trade Statistics,” December 2011, http://censtats
.census.gov/cgi-bin/naic3_6/naicCty.pl (accessed August
16, 2012).
9. Our studies clearly pointed to further areas of
research such as what economic liberalization might
do to relationships with Europe, Japan, and some Southeast Asian countries.
About the Authors
Dan Blumenthal is the director of Asian Studies
at AEI, where he focuses on East Asian security
issues and Sino-American relations. He was
recently named a research associate for the
National Asia Research Program, a joint undertaking of the National Bureau of Asian Research
and the Woodrow Wilson International Center
for Scholars. He has served on the US-China
Economic and Security Review Commission
since 2005, including as vice chairman in 2007,
and has been a member of the academic advisory board for the congressional US-China
Working Group. Blumenthal was previously senior director for China, Taiwan, and Mongolia in
the office of the secretary of defense for international security affairs during George W. Bush’s
first administration. He has written articles and
op-eds for the Washington Post, the Wall Street
Journal, the Weekly Standard, National Review,
and numerous edited volumes. He will publish
a book this year that attempts to marry economic and national security views of China.
Hammond-Chambers began working for the USTaiwan Business Council in October 1994. In
March of 1998, he was promoted to vice president
of the council with additional responsibilities for
office management, staff oversight, financial bookkeeping, and a clear mandate to build out the
council’s member and client base. HammondChambers was elected president of the council in
November 2000. As the trade relationship between
the United States, Taiwan, and China continues to
evolve, he has worked to develop the council's
role as a strategic partner to its members, with the
continuing goal of positioning the council as a
leader in empowering American companies in
Asia through value and excellence. HammondChambers is also the managing director for Taiwan
at BowerGroupAsia. He sits on the advisory boards
of Redwood Partners International, the Sabatier
Group, and the Pacific Star Fund. He is a trustee of
Fettes College, and is a member of both the
National Committee on US-China Relations and
the Council on Foreign Relations.
Rupert Hammond-Chambers was born and
raised in Scotland before emigrating to the
United States in 1987. In 1991, he worked for
the Advanced Telecommunication Corporation,
managing a variety of clients with business
interests in the Caribbean and Latin America. In
April 1993, he joined the Center for Security Policy, a defense and foreign policy think tank in
Washington, DC, as the associate for development. The center accomplishes its goals by stimulating and informing national and international
policy debates, particularly those involving
regional, defense, economic, financial, and technology developments that affect US security.
Michael Mazza is a research fellow in Foreign
and Defense Policy Studies at AEI, where he
studies US defense policy in the Asia-Pacific
region, Chinese military modernization, crossStrait relations, and Korean peninsular security.
Apart from writing regularly for AEI’s Enterprise
Blog, he is also the program manager of AEI’s
annual Executive Program on National Security
Policy and Strategy. In his previous role as
research assistant at AEI, Mazza contributed to
studies on American strategy in Asia and Taiwanese defense strategy. He worked previously
as a policy analyst assistant at SAIC and as an
intern at Riskline Ltd, and has lived and studied
15
TAIWAN, INC.: A HOME FOR GLOBAL BUSINESS
in China. Mazza has written op-eds for the Wall
Street Journal Asia, the Los Angeles Times,
National Review Online, ForeignPolicy.com, the
Weekly Standard, and the American.
Gary Schmitt is codirector of the Marilyn Ware
Center for Security Studies at AEI. A former staff
director of the Senate Select Committee on Intelligence and executive director of the President’s
Foreign Intelligence Advisory Board, Schmitt
was also the executive director of the Project for
the New American Century from 1997–2005. His
books include Of Men and Materiel: The Crisis
in Military Resources (AEI Press, 2007), to which
he was a contributing author and editor with
Tom Donnelly; Silent Warfare: Understanding
the World of Intelligence (Brassey’s, 2002), coauthored with Abram Shulsky and now in its third
edition; and U.S. Intelligence at the Crossroads:
Agendas for Reform (Brassey’s, 1995), a coedited
volume to which he is a contributing author. His
two most recent books (to which he is editor
and contributing author) are The Rise of China:
Essays on the Future Competition (Encounter
Books, May 2009), and Safety, Liberty and
Islamist Terrorism: American and European
Approaches to Domestic Counterterrorism (AEI
Press, 2010).
16
Derek Scissors focuses on the economies of
China and India as a senior research fellow for
economic policy at The Heritage Foundation’s
Asian Studies Center. He also analyzes and comments on economic trends in Japan, Taiwan,
Vietnam, and the rest of Asia, as well as on the
related challenges facing the United States.
Scissors has testified multiple times before both
houses of the US Congress on topics such as rare
earth elements, green energy, trade barriers, and
exchange rate disputes between America and
China. His analysis and commentary have
appeared in Foreign Affairs, National Review,
the New York Times, the Wall Street Journal and
Indian news outlets such as the Hindu and the
Economic Times. Scissors and his work have also
been featured in the Financial Times, the Washington Post, and by news agencies such as the
Associated Press, Dow Jones, Reuters, and Xinhua. Scissors has also been a guest commentator
on Bloomberg, CNBC, CNN, Fox, MSNBC,
National Public Radio, and China’s CCTV, among
other major broadcast outlets. Scissors is an
adjunct professor at George Washington University, where he teaches on the Chinese economy.
Before joining Heritage in 2008, Scissors was the
China economist at Intelligence Research, advising Fortune 500 executives on China operations.